The Producers

One of the most generous business tax benefits included in the
American Jobs Creation Act of 2004 is a new deduction for
"domestic producers." This provision replaces the
extra-territorial income exclusion many exporters used in the past
but that the World Trade Organization declared illegal in 2000.

Under the new tax law, the deduction gradually phases in as the
exclusion for exporters phases out. In addition, it applies not
only to exporters, but also to many U.S. producers. As a result,
many more entrepreneurs will benefit.

The break effectively allows a corporate tax deduction of 3
percent of net income in 2005 and 2006 for companies that meet the
provision's requirements. The deduction increases to 6 percent
in 2007, 2008 and 2009, then jumps to 9 percent in 2010 and
beyond.

To be eligible, you must pass several tests. First, your company
must have taxable income and you must have reported W-2 wages. The
deduction is limited to the lesser of your taxable income, or 50
percent of the W-2 wages you paid during the tax year.

You also must be considered a domestic producer. Fortunately for
many entrepreneurs, Congress has broadly defined the term
producers to encompass not only traditional manufacturers of
tangible personal property in the United States, but also the
following:

Businesses working on many U.S. construction projects

Companies that perform civil engineering and architectural
services for these construction projects

Software producers in the United States

Domestic farmers

Companies that process agricultural products

Most companies that deal with film and videotape production,
renting and licensing

Even more beneficial is the fact that the new deduction is not
limited to C corporations. It's possible for S corporations,
partnerships and perhaps even sole proprietorships to qualify.

Keep in mind that the deduction is based on the net income from
a company's production activities. Be sure to keep separate
records if you engage in both production and nonproduction
activities, says Sarah Williams, CPA and tax manager with Jackson,
Rolfes, Spurgeon & Co. in Cincinnati.

For example, if a company manufactures water softeners and also
services them, the income and expenses related to the production of
the softeners vs. those related to the service activity must be
recorded separately.

The Treasury Department is still formulating the exact details
on how to calculate the new deduction. It plans to issue the rules
within several months, so check this column for an update.

Great Falls, Virginia, writer Joan Szabo has reported on tax
issues for 18 years.